High executive pay is justified by the myth of talent

Management writer David Bolchover argues that the notion of rare talent among senior execs is a self-serving myth

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David Bolchover
On 13 July 2011 07:22

The downward trend in board-level pay announced in the BBC annual report yesterday is welcome. Nevertheless, executive salaries at the corporation and elsewhere in the public sector, not to mention the burgeoning pay in the corporate world and in the finance sector, still appear irrationally high and require substantial overhaul rather than mere tinkering.

How exactly did we get here, and how do we reduce pay of top earners to a reasonable level?

The salary of the BBC Director-General, Mark Thompson, is £671,000. According to a report from the TaxPayers Alliance, around 2,290 people in local government received more than £100,000 last year. 48 local authority executives received more than £250,000, an increase from 19 in the previous year. Meanwhile, a report from Incomes Data Services found that 1,600 managers of NHS hospitals and health trusts now earn more than £150,000 a year.

Neither can we forget the senior executives of the public companies we own through our pensions and savings. Last year, despite the economic slowdown, FTSE 100 director pay climbed 55 percent, with the average CEO taking home £4.9 million. In the City of London, The Centre for Economics Business Research concluded that total bonuses reached £6.7 billion last year, with overall pay increasing by seven per cent.

Can we really make the rational judgement that the beneficiaries of these awards possess the extremely rare abilities that might justify such money?

They would certainly like us to believe so. Since approximately 1980, a year when the highest-paid director at Barclays Bank received £67,500 (the average national salary was around £6,000), a talent ideology has secured a firm foothold within the corporate world. Only a tiny few, so the story goes, have the ability to handle what we are constantly told is the enormous complexity of administering large organisations, or to operate effectively in the finance sector. With this conjuring trick completed before our very eyes, the CEO of Barclays now earns more than £10 million.

Let’s turn our mind back to how the world viewed the talent ideology as it was first emerging thirty years ago. In 1979, the eminent economist John Kenneth Galbraith bemoaned the scale of executive pay (absolutely paltry in comparison to today) and scoffed at the very idea that it was rationally awarded. “No-one can seriously pretend (although some do) that it depends on the scarcity, and thus the market price, of the talent involved,” he wrote.

Two fundamental reasons, working in tandem, explain why the talent ideology is now so powerful, exerting such an enormous influence on executive pay. The first is the immeasurability of individual performance in a knowledge economy, particularly within a huge corporation. The second is increasingly diffuse ownership.

When a multinational company or large team is successful, ascribing that success to one specific individual or small group is extremely difficult. Corporate performance might, for instance, have absolutely nothing to do with the CEO – the company might conceivably have even done better without him. Perhaps the economy was buoyant; maybe a product that had absolutely nothing to do with the CEO became a hit; perhaps there were only two or three serious competitors in the market; maybe the brand of the company that predated the arrival of the CEO by several decades was virtually impregnable.

Similar arguments could be made about a finance sector team that brings in large revenue. Would a “talented” group at, say, Goldman Sachs have been equivalently successful if they had been working for Joe Bloggs & Co? Might the Joe Bloggs staff have performed even better in the Goldman people’s shoes?

In other words, our judgement about individual impact is largely subjective. This presents a threat to employees (on a whim, someone in authority could suddenly decide they are useless), but also a great opportunity. Implement a strategy of relentless self-promotion, constantly telling everyone that you yourself were responsible for corporate or team success, and maybe your “talent” will be eventually accepted as gospel.

Meanwhile, various other constituencies who stand to gain in some way from the dominance of the talent ideology – such as pay consultants and headhunters – do their utmost to give very public credence to this presumption.

And who can mount a vigorous challenge to these vested interests? In the 1950s, more than half the shares in the London Stock Exchange were held by individuals. In those days, the man in the street didn’t tend to possess shares; wealthy individuals or families would own a sizeable chunk of each company. If a senior executive of one of these companies had asked for a huge rise on the basis of their rare talent, they would very likely have been laughed out of court.

Now the population at large owns the majority of the stock market, but mainly through intermediaries – such as pension funds, insurance companies and financial institutions which are themselves public companies. The senior executives of these companies also have a clear vested interest in the promulgation of the talent ideology, and any resistance from the wider public is disparate and poorly organised.

A change in ownership structure also played a crucial role in the rise of the talent ideology within the finance sector. Before the Big Bang in 1986, merchant banks were owned by partners who often earned huge amounts through the profits of their successful companies. When these companies were bought by large banks, high-ranking workers looked for a way to preserve the culture of high pay within the industry despite their loss of ownership. Focusing on their allegedly rare ability fulfilled this mission.

For their part, high-fliers in the public sector were able to threaten to defect to a private sector said to be paying through the nose for talent such as theirs. “Our senior salary policy is the right policy,” the BBC director-general Mark Thompson said last year. “We pay a lot less than other broadcasters - typically a senior manager at the top of the organisation is paid between 50 and 80 per cent less than they could expect to get in the outside world.”

In order to solve any problem, we must first understand its origins and causes. In recent decades, the economic system has been effectively captured by well-positioned employees peddling a false and self-serving ideology. If we really want our money back, there is ultimately no other option but to dismantle this ideology piece by piece.

David Bolchover is the author of “Pay Check: Are Top Earners Really Worth It?”

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